SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 001-14417
BANKFIRST CORPORATION
(Exact name of registrant as specified in its charter)
Tennessee 58-1790903
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
625 Market Street
Knoxville, Tennessee 37902
(address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 423.595.1100
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No __
The number of shares outstanding of each of the registrant's classes of common
stock as of July 31, 1999:
Title of Class Shares Outstanding
Common Stock, $2.50 par value 11,375,600
<PAGE>
BANKFIRST CORPORATION
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements .....................................3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .............................10
Item 3. Quantitative and Qualitative Disclosures about
Market Risk .....................................................17
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders......18
Item 6. Exhibits and Reports on Form 8-K ........................19
SIGNATURES.......................................................19
Note: The accompanying information has not been audited by independent public
accountants; however, in the opinion of management such information reflects all
adjustments necessary for a fair presentation of the results for the interim
period. All such adjustments are of a normal and recurring nature.
The accompanying financial statements are presented in accordance with the
requirements of Form 10-Q and consequently do not include all of the disclosures
normally required by generally accepted accounting principles.
2
<PAGE>
Part I - Financial Information
Item 1. Financial Statements
BANKFIRST CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
June 30, Dec. 31,
1999 1998
-------- --------
(unaudited)
ASSETS
Cash and due from banks $ 31,024 $ 36,136
Federal Funds Sold 1,300 8,850
Securities available for sale 134,145 127,862
Mortgage loans held for sale 13,363 25,642
Loans, net 544,843 501,950
Premises and equipment, net 25,694 24,927
Mortgage servicing rights 8,304 7,484
Federal Home Loan Bank Stock, at cost 3,301 3,189
Intangible assets 1,923 2,002
Accrued interest receivable and other asset 10,922 10,259
-------- --------
Total assets $774,819 $748,301
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Noninterest-bearing deposits $113,921 $117,823
Interest-bearing deposits 503,186 500,143
-------- --------
Total deposits 617,107 617,966
Securities sold under agreements to repurchase 21,317 22,208
Federal funds purchased and other borrowings 15,100 4,166
Advances from the Federal Home Loan Bank 29,223 11,884
Accrued interest payable and other liabilities 7,804 9,236
-------- --------
Total liabilities 690,551 665,460
Stockholders' equity
Common stock: $2.50 par value, 30,000,000 shares
authorized, 11,375,600 shares
outstanding 28,439 28,439
Noncumulative convertible preferred stock: $5 par
value, 1,000,000 shares authorized, 181,050
shares outstanding 905 905
Additional paid-in capital 34,093 34,093
Retained earnings 21,366 17,160
Unrealized gain on securities available for sale (535) 2,244
-------- --------
Total stockholders' equity 84,268 82,841
-------- --------
Total liabilities and stockholders' equity $774,819 $748,301
======== ========
- --------------------------------------------------------------------------------
See accompanying notes to the condensed consolidated financial statements.
3
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<TABLE>
<CAPTION>
BANKFIRST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------------------------
Three months ended June 30, Six months ended June 30,
(Unaudited) (Unaudited)
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans $ 12,498 $ 12,004 $ 24,394 $ 23,579
Taxable securities 1,513 1,425 2,892 2,854
Nontaxable securities 410 463 823 917
Other 140 211 359 303
-------- -------- -------- --------
14,561 14,103 28,468 27,653
Interest expense
Deposits 5,378 5,765 10,691 11,104
Short-term borrowings 444 481 1,009 936
Long-term borrowings 386 208 463 416
-------- -------- -------- --------
6,208 6,454 12,163 12,456
-------- -------- -------- --------
Net interest income 8,353 7,649 16,305 15,197
Provision for credit losses 461 540 880 1,064
-------- -------- -------- --------
Net interest income after provision
for credit losses 7,892 7,109 15,425 14,133
Noninterest income
Service charges and fees 1,184 1,022 2,286 1,979
Net securities gains(losses) (26) 1 10 11
Net gain (loss) on loan sales 1,019 591 1,909 980
Loan servicing income, net of
amortization 33 247 153 479
Trust department income 261 162 525 346
Other 474 260 662 501
-------- -------- -------- --------
2,945 2,283 5,545 4,296
Noninterest expenses
Salaries and employee benefits 4,092 3,694 8,077 7,153
Occupancy expense 537 678 1,052 1,357
Equipment expense 707 542 1,366 1,038
Office expense 479 384 935 693
Data processing fee 441 336 834 620
Advertising 210 79 342 168
Other 1,017 1,337 1,894 2,474
-------- -------- -------- --------
7,483 7,050 14,500 13,503
-------- -------- -------- --------
Income before income taxes 3,354 2,342 6,470 4,926
Provision for income taxes 1,152 866 2,199 1,746
-------- -------- -------- --------
Net Income $ 2,202 $ 1,476 4,271 3,180
======== ======== ======== ========
Earnings per share:
Basic $ 0.19 $ 0.14 $ 0.37 $ 0.31
Diluted $ 0.17 $ 0.13 $ 0.34 $ 0.29
- --------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
BANKFIRST CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Six Months ended June 30, 1999
(Unaudited)
(Dollar amounts in thousands, except share and per share data)
- -----------------------------------------------------------------------------------------
Net
Unrealized Total
Additional Gains Stock-
Common Preferred Paid-in Retained (Losses) holders'
Stock Stock Capital Earnings on Securities Equity
-------- --------- -------- --------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 $24,989 $ 1,093 $23,777 $10,612 $ 961 $61,432
Sale of common stock, 118
shares -- -- 9 -- -- 9
Conversion of 2,703 shares of
Preferred stock into 1,669
Shares of common stock 4 (14) 10 -- -- 0
Stock options exercised,
857 shares 2 -- 26 -- -- 28
Cash dividend on preferred stock -- -- -- (78) -- (78)
Cash dividend on common stock -- -- -- (114) -- (114)
Comprehensive income:
Net income -- -- -- 3,180 -- 3,180
Change in unrealized gains
(losses), net of
reclassification -- -- -- -- 220 220
-------
Total comprehensive income 3,400
------- ------- ------- ------- --------- -------
Balance, June 30, 1998 $24,995 $1,079 $23,822 $13,600 $1,181 $64,677
======= ======= ======= ======= ========= =======
Net
Unrealized Total
Additional Gains Stock-
Common Preferred Paid-in Retained (Losses) holders'
Stock Stock Capital Earnings on Securities Equity
------- ------ ------- -------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1999 $28,439 $ 905 $34,093 $17,160 $2,244 $82,841
Cash dividend on preferred stock -- -- -- (65) -- (65)
Comprehensive income:
Net income -- -- -- 4,271 -- 4,271
Change in unrealized gains
(losses), net of
reclassification -- -- -- -- (2,779) (2,779)
-------
Total comprehensive income 1,492
-------- ------ ------- -------- -------- -------
Balance, June 30, 1999 $28,439 $ 905 $34,093 $21,366 $ (535) $84,268
======== ====== ======= ======== ======== =======
- ------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
5
<PAGE>
BANKFIRST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
Six months ended June 30,
(Unaudited)
1999 1998
-------- --------
Cash flows from operating activities
Net income $ 4,271 $ 3,180
Adjustments to reconcile net income to net cash from
operating activities
Provision for credit losses 880 1,067
Depreciation 909 1,042
Amortization of mortgage servicing rights 870 435
Amortization and accretion, net 56 16
Net (gains) losses on securities sales (10) (11)
Net (gains) losses on sales of mortgage loans (1,909) (980)
Proceeds from sales of mortgage loans held for sale 111,004 56,767
Purchases of mortgage loans held for sale (19,286) (20,482)
Originations of mortgage loans held for sale (79,439) (69,778)
Changes in assets and liabilities
Accrued interest receivable and other assets (580) (3,018)
Accrued interest payable and other liabilities (1,432) (59)
-------- --------
Net cash flows from operating activities 15,334 (31,821)
Cash flows from investing activities
Net cash paid for mortgage company -- (7,449)
Purchase of securities (39,150) (12,098)
Proceeds from maturities of securities 17,338 13,555
Proceeds from sale of securities 12,760 14
Net increase in loans (43,394) 2,110
Purchase of FHLB stock (112) (86)
Premises and equipment expenditures, net (1,896) (1,868)
-------- --------
Net cash from investing activities (54,454) (5,822)
Cash flows from financing activities
Net change in deposits (859) 38,965
Net change in securities sold
under agreements to repurchase (891) (6,252)
Net change in federal funds purchased 10,000 7,851
Increase in other borrowed funds 934 650
Repayment of other borrowed funds -- (6,505)
Advances from the FHLB 27,339 35,500
Repayments to the FHLB (10,000) (20,000)
Repayment of notes payable -- (5,798)
Cash dividends paid on preferred stock (65) (78)
Cash dividends paid on common stock -- (114)
Sales of stock and stock options exercised -- 37
-------- --------
Net cash from financing activities 26,458 44,256
Net change in cash and cash equivalents (12,662) 6,613
Cash and cash equivalents, beginning of period 44,986 31,290
-------- --------
Cash and cash equivalents, end of period $ 32,324 $ 37,903
======== ========
Supplemental disclosures:
Interest paid $ 11,777 $ 12,232
Income taxes paid 1,665 1,692
- --------------------------------------------------------------------------------
See accompanying notes to the condensed consolidated financial statements.
6
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
Principles of Consolidation: The consolidated financial statements include the
accounts of BankFirst Corporation and its wholly-owned subsidiaries, BankFirst,
The First National Bank and Trust Company (together referred to as the "Banks"),
and BankFirst Trust Company, and BankFirst's wholly-owned subsidiary, Curtis
Mortgage Company, collectively referred to as the "Company". All significant
inter-company balances and transactions have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information, and accordingly they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three and six month
periods ended June 30, 1999 are not necessarily indicative of the results that
may be expected for the year ended December 31, 1999.
Borrowings: Repurchase agreements and Federal Funds purchased are generally
overnight borrowings. Federal Home Loan Bank ("FHLB") advances consist of
variable rate long-term advances, which exceed one year.
Reclassifications: Certain items in the 1998 financial statements have been
reclassified to conform with the 1999 presentation.
7
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollar
amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
Earnings Per Share: Basic earnings per share is based on weighted average common
shares outstanding. Diluted earnings per share further assumes issuance of any
dilutive potential common shares. Earnings per share are restated for all
subsequent stock dividends and splits.
A reconciliation of the numerators and denominators of the earnings per common
share and earnings per common share assuming dilution computations are presented
below:
Three Months Ended Six Months Ended
June 30, June 30,
(Unaudited) (Unaudited)
1999 1998 1999 1998
------- ------- ------- -------
Earnings Per Share
Net income $ 2,202 $ 1,476 $ 4,271 $ 3,180
Less: Dividends declared
on preferred stock (33) (39) (65) (78)
-------- ------- ------- -------
Net income available to common
stockholders $ 2,169 $ 1,437 4,206 $ 3,102
======== ======= ======= =======
Weighted average common shares
outstanding 11,375,600 9,997,875 11,375,600 9,998,045
========== ========= ========== =========
Earnings per share $ 0.19 $ 0.14 0.37 $ 0.31
========= ======== ========= ========
8
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollar
amounts in thousands, except share and per share data)
- ------------------------------------------------------------------------------
Earnings Per Share (Continued):
Three Months Ended Six Months Ended
June 30, June 30,
(Unaudited) (Unaudited)
1999 1998 1999 1998
------- ------- ------- -------
Earnings Per Share Assuming
Dilution
Net income available to common
stockholders $ 2,169 $ 1,437 $ 4,206 $ 3,102
Add back dividends upon assumed
Conversion of preferred stock 33 39 65 78
------ ------ ------ ------
Net income available to common
stockholders assuming conversion $ 2,202 $ 1,476 $ 4,271 $ 3,180
======= ======= ======= =======
Weighted average common shares
outstanding 11,375,600 9,997,875 11,375,600 9,998,045
Add: Dilutive effects of assumed
Conversions and exercises:
Convertible preferred stock 558,992 666,298 558,992 666,298
Stock options 372,422 380,898 389,380 380,898
------- ------- ------- -------
Weighted average common and
dilutive potential common
shares outstanding 12,307,014 11,045,071 12,323,972 11,045,241
---------- ---------- ---------- ----------
Earnings per share
assuming dilution $ 0.17 $ 0.13 $ 0.34 $ 0.29
========= ======== ========= ========
9
<PAGE>
Part I - Financial Information
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis is presented to facilitate the
understanding of the consolidated financial position and results of operations
of BankFirst Corporation. The consolidated financial information discussed
herein primarily reflects the activities of the Company's wholly owned community
bank subsidiaries, BankFirst ("BankFirst") and The First National Bank and Trust
Company ("FNB"). The discussion identifies trends and material changes that
occurred during the reported periods and should be read in conjunction with the
consolidated financial statements and accompanying notes appearing elsewhere
herein. The periods included within this document are the three months and six
months ending June 30, 1999 and 1998.
This discussion and analysis includes various forward-looking statements with
respect to credit quality (including delinquency trends and the allowance for
credit losses), corporate objectives and other financial and business matters.
When used in this discussion the words "anticipates," "projects," "expects,"
"believes," "plans", and similar expressions are intended to identify
forward-looking statements. The Company cautions that these forward-looking
statements are necessarily speculative and speak only as of the date made, and
are subject to numerous assumptions, risks and uncertainties, all of which may
change over time. Actual results could differ materially from such
forward-looking statements.
In addition to factors disclosed by the Company elsewhere in this discussion and
analysis, the following factors, among others, could cause actual results to
differ materially from such forward-looking statements: pricing pressures on
loan and deposit products; competition; changes in economic conditions
nationally, regionally and in the Company's markets; the extent and timing of
actions of the Federal Reserve Board; changes in levels of market interest
rates; clients' acceptance of the Company's products and services; credit risks
of lending activities and competitive factors; and the extent and timing of
legislative and regulatory actions and reforms.
Overview
BankFirst Corporation, a Tennessee corporation, is a bank holding company
headquartered in Knoxville, Tennessee that focuses on meeting the banking needs
of East Tennessee businesses and residents through a relationship oriented,
community bank business strategy. The Company conducts its banking business
through BankFirst, a Tennessee banking corporation, which has 24 offices in
Knox, Sevier, Blount, Loudon and Jefferson Counties, and through FNB, a national
banking association acquired on July 2, 1998, with eight offices in McMinn
County. The Company's operations principally involve commercial and residential
real estate lending, commercial business lending, consumer lending, mortgage
servicing, construction lending and other financial services, including trust
operations, credit cards services and brokerage services.
10
<PAGE>
Financial Condition
Total assets grew from $748.3 million at year-end 1998 to $774.8 million at June
30, 1999, a $26.5 million increase. The primary changes in assets included a
$42.9 million increase in net loans, offset partially by a $12.3 million
reduction in mortgage loans held for sale. Of this net loan growth, commercial
loans grew by $26.5 million and installment loans grew by $4.2 million. For the
six months ended June 30, 1999, the mortgage banking subsidiary of BankFirst
purchased and originated $98.7 million of loans and sold $110.1 million of loans
purchased and originated.
Total liabilities grew from $665.5 million at year-end 1998 to $690.6 million at
June 30, 1999, an increase of $25.1 million. Deposits declined $859 thousand
during this period, with approximately $3.0 million in deposits shifting from
noninterest-bearing to interest-bearing. To accommodate the Banks' increased
loan demand, Federal Home Loan Bank advances were increased by $17.3 million and
federal funds purchased were increased by $10.0 million, which accounted for the
increase in total liabilities.
From year-end 1998 to June 30, 1999, equity grew by a net of $1.4 million,
consisting of net earnings of $4.3 million, a preferred stock cash dividend of
$65 thousand, and less a $2.8 million reduction in the difference between the
fair value and amortized cost of securities held for sale.
The leverage capital ratio decreased from 10.7% at year-end 1998 to 9.81% at
June 30, 1999 due to the increase in assets. This ratio maintains the Company in
the "well capitalized" category.
Management expects growth to continue through expansion of retail locations,
expansion of products and services, including mortgage servicing opportunities
by Curtis Mortgage and trust services through BankFirst Trust Company, and
possible future mergers or acquisitions. At the present time, the Company has no
present agreements, arrangements or commitments with respect to any other
acquisition.
Results of Operations
Net interest income increased $1.1 million, or 7.3%, to $16.3 million for the
six months ended June 30, 1999, from $15.2 million for the six months ended June
30, 1998. The increase in net interest income was due primarily to an increase
in total average earning assets and a proportionate increase of earning assets
invested in loans, the Company's highest yielding assets.
The Company's net interest spread and net interest margin were 3.94% and 4.85%,
respectively, for the six months ended June 30, 1999, as compared to 4.04% and
4.99% for the comparable 1998 period. The decrease in the net interest spread
and the net interest margin were primarily attributable to increased competitive
pressures on loan rates, coupled with higher borrowing costs associated with
longer-term liabilities such as fed funds borrowed and Federal Home Loan
Advances.
11
<PAGE>
The provision for credit losses was $880,000 for the six months ended June 30,
1999, compared to $1.1 million for the same period in 1998. The decrease in the
provision was attributable to generally stable delinquency percentages on the
loan portfolio. The Company experienced net charge-offs of $379,000 for the six
months ended June 30, 1999 resulting in a ratio of net charge-offs to average
loans of less than 0.1%.
Noninterest income increased $1.2 million to $5.5 million for the six months
ended June 30, 1999 from $4.3 million for the six months ended June 30, 1998,
primarily attributable to mortgage banking operations and increases in deposit
service charges/fees. Trust fee income increased 52% from $346 thousand for the
first six months of 1998 to $525 thousand for the comparable 1999 period.
Mortgage banking revenues include origination fees, points, gain or loss on
sales of loans, loan servicing income, and recognition of the value of loan
servicing. The value of servicing rights on mortgage loans sold
"servicing-retained" is recognized as an asset, with a corresponding amount
recorded as income; the asset is amortized over the expected life of the loan
since the amount of servicing income earned on each loan declines in proportion
to the loan balance. Net gains and losses on loans, coupled with loan servicing
income and related amortization, were $1.9 million and $153 thousand
respectively for the six months ended June 30, 1999 compared to $980 thousand
and $479 thousand, respectively, for the same period in 1998.
Noninterest expense increased $1.0 million, to $14.5 million for the six months
ended June 30, 1999, from $13.5 million for the comparable 1998 period. The
primary component of noninterest expense is salaries and benefits, which
increased $924 thousand, or 12.9%, to $8.1 million for the six months ended June
30, 1999, from $7.2 million for the same period in 1998. Salaries and benefits
as well as other noninterest expense categories increased primarily due to
increases in personnel. "Other noninterest expense" includes $893 thousand for
the six months ended June 30, 1998 that is attributable to expenses associated
with the merger of FNB (which was finalized in July, 1998) and other
noncapitalized expenses in preparation for the August, 1998 initial public
offering of the Company's common stock.
Net income increased $1.1 million, or 34.3%, to $4.3 million for the six months
ended June 30, 1999 from $3.2 million for the six months ended June 30, 1998.
Provision for Credit Losses and Asset Quality
The provision for credit losses represents charges made to earnings to maintain
an adequate allowance for loan losses. The allowance is maintained at an amount
believed to be sufficient to absorb losses in the loan portfolio. Factors
considered in establishing an appropriate allowance include a careful assessment
of the financial condition of the borrower; a realistic determination of the
value and adequacy of underlying collateral; the condition of the local economy
and the condition of the specific industry of the borrower; a comprehensive
analysis of the levels and trends of loan categories; and a review of delinquent
and classified loans. The Company applies a systematic process for determining
the adequacy of the allowance for loan losses including an internal loan review
function and a monthly analysis of the adequacy of the allowance. The monthly
analysis includes determination of specific potential loss factors on individual
classified loans, historical potential loss factors derived from actual net
charge-off experience and trends in nonperforming loans, and potential loss
factors for other loan portfolio risks such as loan concentrations, local
economy, and the nature and volume of loans.
12
<PAGE>
The recorded values of loans actually removed from the consolidated balance
sheets are referred to as charge-offs and, after netting out recoveries on
previously charged-off assets, become net charge-offs. The Company's policy is
to charge off loans, when, in management's opinion, the loan is deemed
uncollectible, although concerted efforts are made to maximize recovery.
Liquidity and Capital Adequacy
Liquidity management is both a daily and long-term responsibility of management.
The Company adjusts its investments in liquid assets and long and short term
borrowings, based upon management's consideration of expected loan demand,
expected deposit flows and securities sold under repurchase agreements. The
Company believes it has the ability to raise deposits quickly within its market
area by slightly raising interest rates, but has typically been able to achieve
deposit growth without paying above market interest rates. The current strategy
calls for the subsidiary banks to be no higher than second highest in their
pricing as compared to their primary competitors. Deposit growth has funded most
of the significant asset growth in the past several years, but has decreased
modestly as a percent of total funding.
The Company actively solicits customer cash management relationships which often
includes a securities repurchase agreement feature. Under these agreements,
commercial customers are able to generate earnings on otherwise idle funds on
deposits with the subsidiary banks. These accounts are considered volatile under
regulatory requirements, although the Company has found them to be a steady
source of funding. The Company has been able to maintain customer relationships
because of its strong business lending program. While more costly than deposit
funding, these deposit-related accounts are typically the lowest cost borrowed
funds available to the Company.
The primary source of capital for the Company is retained earnings. The Company
paid cash dividends of $65 thousand with respect to its noncumulative
convertible preferred stock, for the first six months of 1999. The Company
retained $4.3 million of earnings for the first six months of 1999. The Company
announced on June 17, 1999 that its Board of Directors had approved a stock
repurchase plan, whereby the Company was authorized to acquire up to 100,000
shares of its Common Stock, representing approximately 0.9% of the 11,375,600
currently outstanding total common shares.
The Company and its bank subsidiaries are subject to regulatory capital
requirements administered by federal and state banking agencies. Capital
adequacy guidelines and prompt corrective action regulations involve
quantitative measures of assets, liabilities, and certain off-balance sheet
items calculated under regulatory accounting practices. The prompt corrective
action regulations provide five classifications, including well capitalized,
adequately capitalized, under capitalized, significantly under capitalized, and
critically under capitalized, although these terms are not used to represent
overall financial condition. If under capitalized, capital distributions are
limited, as is asset growth and expansion, and plans for capital restoration are
required.
13
<PAGE>
Under guidelines issued by banking regulators, the Company and its bank
subsidiaries are required to maintain a minimum Tier 1 risk-based capital ratio
of 4% and a minimum total risk-based ratio of 8%. Risk-based capital ratios
weight the relative risk factors of all assets and consider the risk associated
with off-balance sheet items.
The Company's Tier 1 risk-based and total risk-based ratios were 12.76% and
13.98% respectively, as of June 30, 1999. Both bank subsidiaries also
individually met the definition of "well capitalized" as of June 30, 1999.
Market Risk
The Company uses an earnings simulation model (summarized below) to analyze the
net interest income sensitivity. Potential changes in market interest rates and
their subsequent effect on interest income is then evaluated. The model projects
the effect of instantaneous movements in interest rates of 100 and 200 bp.
Assumptions based on the historical behavior of the Company's deposit rates and
balances in relation to interest rates are also incorporated into the model.
These assumptions are inherently uncertain and, as a result, the model cannot
precisely measure net interest income or precisely predict the impact of
fluctuations in market interest rates on net interest income. Actual results
will differ from the model's simulated results due to timing, magnitude and
frequency of interest rate changes, as well as changes in market conditions and
the application of various management strategies.
Even though the Company's cumulative gap at one year is negative, the earnings
simulation model indicates that an increase in interest rates of 100 bp and 200
bp would result in increased net interest income. This occurs because management
believes that if overall market interest rates increase modestly, the market
would not require an immediate, corresponding repricing of non-term deposit
liabilities.
As shown in the tables below, there was a change on the impact of interest rate
changes on net interest income at June 30, 1999 compared to December 31, 1998.
The Company continues to remain asset sensitive, causing a projected decrease in
net interest income from a decrease in interest rates, and having an opposite
affect from an increase in interest rates.
14
<PAGE>
Market Risk Analysis
At June 30, 1999
Decrease in Rates Increase in Rates
200 100 100 200
Basis Basis Level Basis Basis
Points Points Rates Points Points
Projected Interest Income
Loans 44,114 48,045 52,503 56,523 61,315
Investments 6,730 7,575 8,297 9,074 9,864
Federal Funds Sold 51 74 86 99 124
Total Interest Income 50,895 55,694 60,886 65,696 71,303
Projected Interest Expense
Deposits 17,319 19,593 21,316 23,330 25,313
FHLB Term Advances 870 1,147 1,424 1,701 1,955
Fed Funds Purchased 3 3 3 3 3
& Other Borrowings 1,118 1,332 1,485 2,000 2,167
Total Interest Expense 19,310 22,075 24,228 27,034 29,438
Net Interest Income 31,585 33,619 36,658 38,662 41,865
Change from Level Rates (5,073) (3,039) -- 2,004 5,207
% Change From Level Rates (13.84%) (8.29%) -- 5.47% 14.20%
Summarized Market Risk Analysis
At December 31, 1998
Decrease in Rates Increase in Rates
200 100 100 200
Basis Basis Level Basis Basis
Points Points Rates Points Points
Projected Total
Interest Income $49,667 $51,888 $54,105 $56,333 $58,546
Projected Total
Interest Expense 20,824 22,594 23,524 25,032 26,394
Net Interest Income 28,843 29,294 30,581 31,301 32,152
Change from Level Rates (1,738) (1,287) -- 720 1,571
% Change From Level Rates (5.68%) (4.21%) -- 2.35% 5.14%
15
<PAGE>
Year 2000
The Company has implemented plans to address Year 2000 compliance. The issue
arises from the fact that many existing computer programs use only a two digit
field to identify the year. These programs were designed without considering the
impact once the calendar year rolls over to "00". If not corrected, computer
applications could fail or create inaccurate results by or at the Year 2000.
The Company initiated a comprehensive Year 2000 compliance program in mid-1997.
This included an Awareness and Assessment phase and a Remediation phase, and
began a comprehensive Testing phase during 1998. BankFirst affiliated data
processing service bureau implemented new software, which has been Year
2000-certified, and BankFirst completed its conversion to this new software in
April 1998. Conversion to the new host system necessitated an upgrade of
BankFirst's personal computers and their operating systems, which have been
tested for Year 2000 compliance. FNB's data processing service bureau is also
Year 2000 ready. Curtis Mortgage Company converted its existing servicing system
to a Year 2000-compliant new servicing system during July, 1999. Management
believes the Company's Year 2000 program is on target with the goals established
by its regulators, in that it has 100% of its mission-critical testing complete
in out-sourced, host-based services, as well as its internal and
third-party-supported, mission-critical systems. Facilities, office equipment,
supplies, security equipment, HVAC and elevator systems have all been assessed
and, where possible, tested. All testing of both internal and external systems
was completed by June 30, 1999.
The Company has evaluated its Year 2000 compliance-related credit risk and
Management believes that the overall risk is low due to the high concentration
of hotel/motel and real estate credit relationships. Larger Commercial Loan
customers maintaining total credit relationships of $500,000 or more with the
Company have been aggressively evaluated by their Relationship Manager regarding
their possible Y2K credit risk. Year 2000 credit risk analysis is an ongoing
monitoring and evaluation effort within the Banks.
Management believes that the total costs of becoming Year 2000 compliant have
not and will not be material. During 1998, BankFirst incurred approximately
$163,750 in both hard and soft costs regarding its Year 2000 efforts. The
Company has attempted to calculate internal salary hours applied to this effort,
and this value is included in the 1998 and 1999 expense, as appropriate. Year
2000 project costs for 1999 are anticipated to be approximately $250,000, and to
date, over half of this expense has been incurred.
Management understands the broad scope of the Year 2000 issue and thus has
developed a Year 2000 program which includes monitoring of those other entities
with which it routinely interacts, including suppliers, creditors, borrowers,
customers and other financial service organizations. While monitoring of these
entities allows the Company to assess its possible Year 2000-related risks, the
Company also has been developing a broad-spectrum business resumption
contingency plan designed to minimize adverse impact to mission critical
systems. The plan includes analysis of customer demand for currency and funds
availability. The plan also consists of developing and
16
<PAGE>
testing alternative methods and locations for core service delivery and
operations support. The Company is currently in an aggressive testing schedule
for this business resumption contingency plan, and indications to date are that
no major modifications to the plan will be required. Additionally, each Bank's
service bureau maintains a contingency plan for data processing. The service
bureaus each house a second, tested, Year 2000 compliant system in the event of
system failure. The service bureaus also maintain an off-site data processing
system with a third-party data processor in the event of critical power failure.
Both contingency systems have been certified Year 2000 compliant and have been
tested by the banks using post-January 2000 dates.
Management believes that the Company and its affiliates are currently in
compliance with each applicable directive issued by bank regulation authorities.
New Accounting and Reporting Requirements
SFAS No. 133, "Accounting for Derivative Financial Instruments and Hedging
Activities". SFAS No. 133 requires companies to record derivatives on the
balance sheet as assets or liabilities at fair value. Depending on the use of
the derivatives and whether they qualify for hedge accounting, gains or losses
from changes in the value of such derivatives would either be recorded as a
component of net income or as a change in stockholders' equity. Until recently,
BankFirst was required to adopt the new standard January 1, 2000. However, in
July, 1999 the Financial Accounting Standards Board issued SFAS 137 to extend
the implementation date of SFAS 133 until January 1, 2001. Management has not
yet determined the impact of this standard.
FDIC Improvement Act of 1991 ("FDICIA"). The FDICIA stipulates many
responsibilities of financial institutions, their boards of directors, and
accountants. Many of the provisions have already been effective for the Company;
however, there are certain filing requirements which are only applicable to
banks with assets over $500 million. This threshold is measured on an individual
bank basis, not on consolidated assets. BankFirst, taken alone, is already
subject to this act. As a result, BankFirst will be required to comply with the
FDICIA reporting requirements during 1999. FNB had total year-end 1998 assets of
$196 million, and is not anticipated to be subject to the FDICIA reporting
requirements for the foreseeable future.
Part I - Financial Information
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The information is disclosed in Item 2, Management's Discussion and Analysis of
Financial Condition and Results of Operations.
17
<PAGE>
PART II. - OTHER INFORMATION
Item 4. Submission of Matters to a vote
of Security Holders
On April 19, 1999 the Company held its Annual Meeting of Shareholders. At the
meeting, there were two matters submitted to the shareholders for voting:
1) To elect eight Directors to hold office until the next Annual Meeting
of Shareholders or until their successors are elected and qualified.
2) To consider and vote upon a proposed amendment to the Company's Charter
increasing the number of shares of authorized common stock from
15,000,000 to 30,000,000.
The following table represents the names and voting results of each Director
referred to above in Item 4. 1):
<TABLE>
<CAPTION>
Votes Votes Votes Number of
Name of Director in Favor Against Withheld Broker Non-votes
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
James L. Clayton 9,442,591 1,780 1,285 Not Applicable
Fred R. Lawson 9,441,421 2,950 1,285 Not Applicable
C. Scott Mayfield, Jr. 9,444,371 0 1,285 Not Applicable
C. Warren Neel 9,441,421 2,950 1,285 Not Applicable
Charles Earl Ogle, Jr. 9,445,656 0 0 Not Applicable
W. David Sullins, Jr. 9,430,911 13,460 1,285 Not Applicable
L. A. Walker, Jr. 9,434,121 10,250 1,285 Not Applicable
Geoffrey A. Wolpert 9,445,656 0 0 Not Applicable
</TABLE>
The following table represents the voting results of Item 4.2) above, concerning
the proposed amendment to increase the number of shares of authorized common
stock:
Votes Votes Votes Number of
in Favor Against Abstained Broker Non-votes
- --------------------------------------------------------------------------------
9,412,751 50,050 9,515 0
18
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit 27 - Financial Data Schedule (filed electronically with
the SEC)
b. Reports on Form 8-K
The Company filed one report on Form 8-K dated June 17, 1999 during
the reporting period, reporting the Board of Directors'
authorization of a stock repurchase program for the Company's Common
Stock; this Form 8-K is hereby specifically incorporated herein by
reference.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BANKFIRST CORPORATION
Date: August 13, 1999 by:/s/ C. David Allen
-----------------------------
C. David Allen
Chief Financial Officer
19
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
These schedules contain summary financial information extracted from the
consolidated balance sheets, the consolidated statements of income, and Company
records, and are qualified in their entirety by reference to such financial
statements. All dollar amounts are in thousands, except per share data.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 28,402
<INT-BEARING-DEPOSITS> 2,622
<FED-FUNDS-SOLD> 1,300
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 134,145
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 551,946
<ALLOWANCE> 7,103
<TOTAL-ASSETS> 774,819
<DEPOSITS> 617,107
<SHORT-TERM> 21,317
<LIABILITIES-OTHER> 7,804
<LONG-TERM> 0
0
905
<COMMON> 28,439
<OTHER-SE> 54,924
<TOTAL-LIABILITIES-AND-EQUITY> 774,819
<INTEREST-LOAN> 24,394
<INTEREST-INVEST> 3,715
<INTEREST-OTHER> 359
<INTEREST-TOTAL> 28,468
<INTEREST-DEPOSIT> 10,691
<INTEREST-EXPENSE> 12,163
<INTEREST-INCOME-NET> 16,305
<LOAN-LOSSES> 880
<SECURITIES-GAINS> 10
<EXPENSE-OTHER> 662
<INCOME-PRETAX> 6,470
<INCOME-PRE-EXTRAORDINARY> 6,470
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,271
<EPS-BASIC> .37
<EPS-DILUTED> .34
<YIELD-ACTUAL> 8.28
<LOANS-NON> 534
<LOANS-PAST> 2,535
<LOANS-TROUBLED> 106
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6,602
<CHARGE-OFFS> 314
<RECOVERIES> 65
<ALLOWANCE-CLOSE> 7,103
<ALLOWANCE-DOMESTIC> 7,103
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,618
</TABLE>
